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A Way to Decide Whether You Actually Need an Annuity · How to Retire on Time

• 0:00
  Mike: Hey. Thanks for joining. Here's a question I was recently asked on my show, how to retire on time. Take a look.
• 0:12
  David: What's your process to determine if an annuity makes sense or not?
• 0:20
  Mike: I would I would... You first start with the plan. Uh-huh. And then when you get to the strategy section, part of that is, in strategy, is growth mechanisms. Not products, but growth mechanisms.
• 0:37
  So, for example, if you're looking at something like you want payments. Mhmm. Okay? Payments, mailbox money, that's where you're gonna compare basically, like buying long term bonds or buying a a... An income stream from an insurance company, an annuity, or you're looking at structured notes for payments, or you're looking at real estate for payments.
• 1:02
  K? All of those have a growth mechanism that they're giving cash to you, that's cash flow. Mhmm. And then you either decide to reinvest it or to spend it.
• 1:13
  David: Okay.
• 1:14
  Mike: Right? So you're you're structuring cash flow in the form of payments or dividends. Okay. And that might be a strategy that you want to implement for one reason or another. Whereas, there might be I want growth.
• 1:27
  I want the price or the dollar amount to increase, not dependent on payments or structure, but as much upside potential, but there's some variability with it. It might be a good year. There might be a lesser year. Those are two different growth mechanisms. Do you see how we're kind of defining things first?
• 1:44
  Yes. And then you shop product after that. So if you say I want income stream. Okay. What are the benefits and detriments of doing a real estate investment trust?
• 1:53
  A REIT. Mhmm. Versus doing preferred stock in real estate. Versus doing a structured note. Versus buying an annuity.
• 2:04
  Versus buying a bond. Boring as can be. Yeah. And then when you factor in their payout structures, then you have to factor in inflation. Then you have to factor in could they not pay out?
• 2:19
  Mhmm. So then you look at the detriments, and then you start selecting the tools appropriately. And what I've come to really realize is some people prefer structured payments with an out whenever they feel like it. They're not really committed, they just want it temporarily, but they know they wanna change their mind later. So in things like that, you've got bonds.
• 2:39
  Whereas, if someone says, well, I want it for now. I just want five years. I wanna bridge a gap. Maybe you do preferred stock that's only gonna pay out for five years, and then you have the ability to sell it and move on.
• 2:51
  David: Okay.
• 2:52
  Mike: Right? Maybe you like REITs. Maybe you don't like REITs. Maybe you're saying, I just want this money to come in regardless. That's the annuity.
• 3:01
  They all have different benefits and detriments. And I think one of the problems are, and I all get caught up sometimes with this is just focused on yield. It's nice to have flexibility. Now I like yield and retirement plans. I I will with today's rates, I might favor saying, you're gonna at least spend 20 to $30,000 a year, every year for your life.
• 3:24
  We can guarantee that through an insurance company and use that as the index annuity side of it. And then maybe bridge the gap of the flexibility with some of the other stuff. A huge component of blending. Like a blend tech fanatic when it comes to financial portfolio strategy. Yes.
• 3:46
  An immersion blender. That's actually my favorite blender. But the point being is is we need to stop treating any investment or product as the assumed pitch that you were given. Mhmm. Let me go to the growth side of things now.
• 4:03
  Okay? The reason why we originally put bond funds in the portfolio was to stabilize it. You might have less growth potential, but you've also got less downside risk. And bond funds still have like this this chugging engine of whatever the yields are. So it's kind of a good situation.
• 4:19
  Right? Yeah. But bond funds can lose money. That's one of the detriments. Whereas you might want a buffered ETF if you're comparing a max buffer.
• 4:28
  It's like, okay, you can't really lose money, maybe up to 4% over a twelve month period of time. Worst case scenario, right? Depends on what you have. But you have limited upside potential. You could do an index annuity and get more upside potential if you do the accumulation ones, not the income ones.
• 4:46
  David: Okay.
• 4:47
  Mike: But you're gonna give up liquidity because that's how economics work. You have growth, liquidity, and protection.
• 4:53
  David: You don't get all three?
• 4:54
  Mike: You can't get all three. You pick two of them. So you say, don't really need this money for at least five, seven, ten, whatever years, but I wanna stabilize the portfolio for the next little bit. So then maybe that's the appropriate thing. So it's...
• 5:06
  You have to just ask, and there's there's structured notes that are more growth and not income focused.
• 5:12
  David: So you wouldn't you wouldn't receive a payment from some notes, you would just accumulate more value or like overall value.
• 5:19
  Mike: A structured note is basically a product from a bank.
• 5:21
  David: Okay.
• 5:22
  Mike: It's it's like structured notes, index annuities, insurance company, investment banks.
• 5:27
  David: Oh, alright. Very similar. Alright. They're they're very similar, just the institution that's setting it up is different.
• 5:35
  Mike: And the the internal mechanisms too. So like, right now, I am favoring indexed annuities. But couple of years ago, I might have favored structured notes. After the next market crash, I might favor more structured notes.
• 5:47
  David: Okay.
• 5:49
  Mike: A situational awareness like that hedge fund that's having a rough go, but there are... You wanna be aware of the current economic situation.
• 6:00
  David: The environment, we might call it.
• 6:02
  Mike: Yeah. Dare we say.
• 6:04
  David: Yeah. So,
• 6:05
  Mike: the process of determining if Annuity makes sense or not is at the end, and it's asking which of the various strategies to serve this specific mission best fit what you want. The product selection has to be at the end. You don't want the products or the investments to get in the way of the strategy, and you don't want the strategies to prevent the goals of the plan to be met.
• 6:28
  David: So you could say, hey, in in years, between years two and five of my retirement, I I wanna draw these payments. And then once you decide that I can fill in with these products or strategies or these products that will help. Mhmm. This is year two, this is year three, this is year four. Yeah.
• 6:46
  Okay. And maybe Annuity is in that mix, maybe it's not.
• 6:51
  Mike: And it's okay if it's not. Yeah. Honestly, like...
• 6:54
  David: Right, right.
• 6:55
  Mike: It has to make sense.
• 6:57
  David: Yeah. People aren't coming into us and then you're immediately saying, before you even know what they want, oh, here's the annuity we have for you.
• 7:05
  Mike: Yeah. Here's here's the REIT we're gonna sell.
• 7:07
  David: Oh, or the REIT or the, yeah, structured notes.
• 7:10
  Mike: It's like, come on. Yeah. You know, a portfolio that gives charges one to 2% a year, it's the same kind of shtick as selling an annuity that's gonna pay five to 7% back in commission. No, it doesn't come from you. There's still a payment there.
• 7:28
  Or a REIT or a Delaware statutory trust that has a back in commission. Like there there's always money moving somewhere. Mhmm. And that's fine. It just isn't the right tool.
• 7:37
  Like it's... You don't get upset with Home Depot for selling you a hammer.
• 7:40
  David: Right.
• 7:41
  Mike: You walked in there to buy a hammer, you knew you needed a hammer. The conversation about whether you needed a hammer or not that happened before you got to the store, that's the conversation that matters. That's the plan that needs to happen first. Uh-huh. And then what kind of hammer?
• 7:55
  A lot of versions of hammers. Yeah. So hammers are easy. So and this is why we highly encourage people to sign up for our planning process. Plan first, strategy second, then the products third.
• 8:08
  The tools in the toolbox. What tools go in your toolbox for your... The strategies you wanna implement and the plan you wanna follow. Go to retireontime.com/call, call, to get started. Schedule a call.
• 8:21
  Start that conversation. It doesn't cost you anything to get the first version of the plan, see the projections, and explore a couple of strategies before you have to commit to anything. And then if you do commit, it's a one time fee to finish the entire planning process. Yeah. Alright.
• 8:36
  We got another question. Let me pop this one in here. Your last surviving parent, let's assume, has $2,000,000 or more in a traditional IRA, and they expect to live at most for two more years. Oh, this is a good situation. Oh.
• 8:51
  Well, okay. It's not good that they're gonna live for two more years. This is an interesting financial question. Yes. Yes.
• 8:57
  Yes. Yes. Should should they convert Roths aggressively?
• 9:02
  David: So
• 9:03
  Mike: there's there's layers to this. The first question is, what's their tax bracket tax situation?
• 9:11
  David: The parent who owns it? The parent who owns Okay.
• 9:14
  Mike: And then where's the money going to? So if the parent already has a high tax situation, is taking a lot of income, they're in the thirty second bracket, but their kids are struggling to make ends meet, I wouldn't worry about it. Let the kids convert it over the next ten years under their brackets.
• 9:31
  David: Mhmm.
• 9:31
  Mike: Now, let's do the inverse. The parents really live off of very little. The kids, they're high income earners.
• 9:40
  David: Okay.
• 9:41
  Mike: Converted aggressively. Uh-huh. Every year you've got coupons. It just depends on who holds the coupon, whether it's the parent or the kid, and how much can they get out of that coupon. Uh-huh.
• 9:52
  You know, you go to CVS. I talk about CVS a lot. It's it's the fall. Yeah. Kids get sick.
• 9:58
  Right? I was there last night picking up allergy medication Uh-huh. With my son. That's a normal thing. Uh-huh.
• 10:05
  And I just love their receipts. Yeah. It's like 50 coupons in a receipt. It's just hilarious. Half of them I don't need, but it's still like, you wanna know the receipts, the coupons that you could use every year in taxes.
• 10:17
  And there are a lot of them.
• 10:19
  David: Mhmm.
• 10:20
  Mike: So now, for the younger people, something we have structured, and you can find my Kipling articles on this. If you're like 60 to 60 years old or younger, you may consider if you have the right assets and it fits in the plan, funding some index universal life insurance. Why is that? Because it's gonna act similar as a Roth except for you can pay the taxes, So you fund it over time in preparation for potential traditional IRA inheritance. And then when you take money out of the inherited IRA, you're gonna pay ordinary income tax on it, but you don't actually pay it when you take it out.
• 10:58
  You have the life insurance. You borrow against life insurance to pay it. That's a fancy way of creating potential positive arbitrage.
• 11:06
  David: Okay.
• 11:06
  Mike: It's a way to absorb the tax blow that you're going to hit and try and make some money back along the way. It's appropriate to say, in my opinion, that the net of insurance fees, the cash growth of something like that, net of insurance fees should be equivalent to like a a really nice competitive buffered ETF or like a nice index annuity, maybe even slightly higher. Better than bond funds at least. Alright. Probably not gonna beat the market, but it gives you an additional strategy that you may not have had otherwise.
• 11:37
  That's why we ask about your parents when you plan with us. So we wanna have that more comprehensive conversation. So great question. Yeah. You wanna know what their income brackets are, what your brackets are, what's the most beneficial way that's over the next ten years of their two years left, eight years after, or ten years after, to just kind of how do you get it out in the most strategic way possible.
• 12:02
  Yeah. Lot of levers there. A lot of layers.
• 12:04
  David: Yeah. And, yeah, we we shouldn't just say, oh, well, let's convert to Roth just for the sake of it just because it sounds good. Right? Oh, yeah. Tax free.
• 12:13
  It sounds incredible. Then Yeah. But it may not be.
• 12:17
  Mike: Many times what feels good isn't actually good for you. Alright. So I hope that answers your question. But it's it's it's mostly about tax bracket management. It's a hot potato you're passing around.
• 12:29
  Something you might do too is consider the beneficiaries. Like, what if you have some adult kids that could maybe inherit some of the traditional IRA and help them out? Yeah. That might lower some of the burden. Right.
• 12:44
  Just be careful of generational skipping tax and there's nuance there, but you just... That's that's why you wanna explore different options. That's all the time we've got for today's show. If you enjoyed the show, thanks for tuning the podcast. Don't forget to subscribe, leave a rating, and as always, tell your friends, the larger the subscribers are, the better the content can be that fuels your preparation for retirement.
• 13:06
  We'll see you in the next show.